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December 2012

DCIT v. Dodsal Pvt. Ltd (ITA No.2624/ Mum/2006) Asst Year: 2002-03 Dated 29-08-2012 Counsel for the Revenue: Mrs. Kusum Ingle Counsels for the Assessee: Mrs. Aarti Visanji and Mr. Arvind Dodal

By Tarunkumar G. Singhal, Anil D. Doshi, Chartered Accountants
Reading Time 2 mins
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Section 40 (a)(i) Article 12 of India Canada DTAA – Agreement for purchase and installation services issued under ‘common letter of intent’ cannot be read in isolation of each other.

Installation services that are ancillary/inextricably linked to supply of equipment are not taxable under the India-Canada DTAA.

Facts
The Taxpayer, an Indian Company (ICo), is engaged in the business of engineering and general contracting.

During the relevant year a Canadian company (FCo) supplied certain equipment to ICo and also rendered installation and commissioning services. The services were rendered under a separate contract.

The payments in respect of installation and commissioning charges to FCo were made without deducting any taxes on the basis that the same was not chargeable to tax in India as per the exclusion given in Explanation 2 to section 9(1)(vii) of IT Act and Article 12(5)(a)3 of the India-Canada DTAA (DTAA).

The issue before the Tribunal was whether the consideration paid by ICo to FCo on account of installation and commissioning charges is covered by the exclusion provided in Explanation 2 to section 9(1) (vii) and/or under article 12(5)(a) of the DTAA.

Held
The contract for services was entered into by ICo simultaneously on the same date as that of the supply contract and both the contracts, i.e., for supply of equipment as well as installation and commissioning of said equipment were placed with reference to the same letter of intent.

With regard to taxability u/s. 9(1)(vii) of the IT Act, the Tribunal held that the services were not covered within the exclusion provided for construction and like activities, as the same refers to consideration for actual construction activities undertaken in India and not the consideration for any services in connection with the construction project.

Under the DTAA, having regard to this fact and the terms and conditions of both the contracts, Tribunal observed that the services of installation and commissioning rendered by FCo were ancillary and subsidiary, as well as inextricably and essentially linked, to the supply/sale of the equipment and therefore, they were not chargeable to tax in India in the hands of FCo as fees for included services by virtue of article 12(5)(a) of the DTAA.

ICo, therefore, was not liable to deduct tax at source from the said payment made to FCo and the disallowance made by the tax authority was not sustainable.

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